Jefferies Group, a well-known Wall Street investment bank: Bitcoin is becoming institutionalized

From an ownership perspective, Bitcoin and gold are not mutually exclusive, but Bitcoin has an edge right now, with investors from different generations attracted to it, such as baby boomers and millennials.

Source: Jefferies Group

Compiled by: Carbon Chain Value Original Team

The most impressive thing about 2020 is undoubtedly the COVID-19 epidemic, but this year also has special significance for Bitcoin. After 12 years of development, Bitcoin has become more and more mature this year.

Jefferies Group, a well-known Wall Street investment bank, recently analyzed the Bitcoin market in its "Fear & Greed" investment weekly report. There is no doubt that the performance of the Bitcoin market in 2020 can be described as amazing. At the time of writing this article, according to Coingecko data, the price of Bitcoin has reached $23,547.46, which is 474% higher than the low price of "Black Thursday" on March 12, and 214% higher than the beginning of this year. On December 16, 2020, the price of Bitcoin broke through $20,000 for the first time in history, with a single-day increase of 9.2% (as shown in Figure 1 below). This Bitcoin price surge is completely different from 2017. With stronger fundamentals and many other reasons, the price of Bitcoin may even rise higher.

Some institutional investors and investment "bigwigs" have publicly purchased Bitcoin. In addition, retail investors now have the opportunity to use various investment tools to buy Bitcoin, such as the Grayscale Bitcoin Trust Fund in the United States, and the VanEck Vectors Bitcoin Exchange Traded Notes recently launched on the Frankfurt Stock Exchange. The rising premium of Grayscale's Bitcoin Trust Fund indicates that more and more institutions are beginning to seek Bitcoin investment exposure, even at a price higher than the spot price. It is almost certain that Bitcoin has become part of the financial system today.

There is no doubt that large institutional investors have played a very important role in this rapidly rising Bitcoin bull market. Without their entry, it is difficult to say whether Bitcoin can achieve a historical breakthrough in three months. Broadly speaking, this Bitcoin bull market is led by institutional investors and high-net-worth individuals, who are more likely to hold Bitcoin for a long time rather than return to the exchange. Before institutional investors bought Bitcoin, there were many risks in the Bitcoin market. In addition to the possibility of Bitcoin accounts being hacked, Bitcoin has always been considered the most commonly used payment method for illegal traders, such as buying illegal narcotics on the dark web. But with the entry of institutional investors, Bitcoin has now been rectified. This market rise actually started in August. At that time, the most important indicator was that Nasdaq-listed business intelligence software MicroStrategy announced its entry into the Bitcoin market. On August 11, 2020, MicroStrategy announced that it had invested $250 million in Bitcoin, which sounded the clarion call for institutional investors to enter the Bitcoin market. On September 8, MicroStrategy announced that it would invest $175 million in Bitcoin. So far, the company's investment in Bitcoin has reached $425 million. According to the 8-K application form submitted by MicroStrategy to the U.S. Securities and Exchange Commission (SEC), the company will choose Bitcoin as a major reserve asset, and Bitcoin is the same as cash and other short-term investments in its balance sheet. MicroStrategy then invested another $50 million in Bitcoin in early December, and the company currently holds a total of 40,824 Bitcoins.

The cryptocurrency market began to rise just after the audit department and the U.S. Securities and Exchange Commission approved MicroStrategy to include Bitcoin on its balance sheet. This event may be the watershed of the second wave of the bull market. Soon, just after MicroStrategy publicly invested in Bitcoin, payment company Square also began to follow suit. They took out 1% of the company's total assets, about 50 million US dollars, to invest in Bitcoin. Square Chief Financial Officer Amrita Ahuja said: "We think Bitcoin has the potential to become a more common currency in the future. Investing in Bitcoin is just our first step." Although Square's investment in Bitcoin is not large, and it may not even need to be publicly reported, the effect and significance produced in the current market environment are the same. In addition, on October 21, 2020, PayPal also announced its official entry into the Bitcoin industry, allowing users to directly purchase cryptocurrencies such as Bitcoin. Just one month later, the number of Bitcoin purchased by PayPal accounted for 70% of the newly mined Bitcoin that month.

Many people actually did not expect MicroStrategy to enter the cryptocurrency market at all, because as a traditional smart business company, they mainly focus on technology and software, and their business has been deployed in the traditional technology industry for nearly 31 years. Since announcing the investment in Bitcoin, MicroStrategy's market value has increased by 131% to US$2.77 billion (as shown in Figure 2 below). In addition, the value of MicroStrategy's previous investment in Bitcoin has almost doubled, currently about US$917 million. Since its listing in 1998, MicroStrategy co-founder Michael Saylor has served as the company's CEO for 22 years. He has never been a "quick money" operator, so this choice to invest in Bitcoin should be a well-considered decision. It is worth noting that Michael Saylor did not begin to understand Bitcoin until 2019, and then decided to invest part of the company's funds in Bitcoin in the spring of 2020 as a store of value, because he believes that Bitcoin is digital gold, stronger, faster, and smarter than any currency. As the world's best stored-value asset and a market-leading currency network, Bitcoin can effectively solve the value storage problem faced by every person, company, and government on the planet. Invest in Bitcoin and the world will become a better place. So Michael Saylor convinced the auditors and lawyers, and the auditors finally approved MicroStrategy to invest in Bitcoin in just ten weeks.

Source: Bloomberg

Michael Saylor believes that although Bitcoin is an ideal reserve asset, for those who hold gold, they now feel that Bitcoin has begun to threaten the value proposition of gold and is "de-golding". From the perspective of ownership, Bitcoin and gold are not mutually exclusive, but Bitcoin is more advantageous now, and investors of different generations will be attracted to Bitcoin, such as baby boomers and millennials.

If you are a gold investor, you may need to pay attention to the actual risks of this safe-haven asset. Due to the impact of the new coronavirus epidemic, G7 countries have implemented monetary quantitative easing policies, and legal currencies around the world are at risk of depreciation. In the past, gold, a safe-haven asset, could indeed hedge such risks, but now the safe-haven attribute is being transferred to Bitcoin - it is worth mentioning that this transfer process has actually begun. Another cruel fact is that in fact, the United States launched a monetary quantitative easing policy as early as after the financial crisis in 2008. If calculated from then, the value of Bitcoin has increased by more than 177,000 times that of gold (as shown in Figure 3 below). The reason for such an astonishing increase is largely because Bitcoin is a deflationary asset, and the supply is also fixed (21 million pieces), and the issuance volume is reduced by half every four years. In contrast, although it is very difficult to mine, the supply of gold is not fixed.

Source: Bloomberg

However, gold has not been completely abandoned by investors. Although the recent poor performance of gold relative to US real interest rates and the US dollar has caused some investors to worry that Bitcoin is replacing gold as the preferred inflation hedge tool, the growing popularity of Bitcoin does not currently pose a threat to gold's status. In addition, as more and more vaccines are launched, the new coronavirus epidemic is expected to ease over time. Once the Federal Reserve decides not to implement monetary quantitative easing policies, the market is likely to enter a new round of cyclical recovery, and gold prices may rise again. According to the information disclosed by the latest meeting of the Federal Open Market Committee (FOMC) of the Federal Reserve, since the new coronavirus vaccine has been approved for marketing, the market may enter a recovery state in the future, but it is expected that only 2% inflation target will be achieved by 2023, and most Federal Reserve directors believe that short-term low interest rates will continue for at least three years, at least three years. If the new coronavirus epidemic is effectively controlled, there may be signs of cyclical recovery in the financial market in 2021, and previously suppressed demand may be released. It is worth paying attention to whether the Federal Reserve will stick to low interest rates. If it were simply because the financial system could not withstand higher interest rates, the dovish Federal Reserve might still keep interest rates low, but the problem is that although low interest rates will not cause drastic market fluctuations, they will at least cause slight fluctuations, and global investors need to understand this.

Chris Wood, head of global equity strategy at Jefferies Group, a well-known Wall Street investment bank, suggested as early as June 2019 that investors could hold Bitcoin. In his weekly letter to investors, Chris Wood said that Bitcoin is continuing to rise and called it a better way to store value than gold. He wrote: "Physical gold investment, which previously accounted for 50% of the pension fund portfolio, will gradually decrease by five percentage points in the next few years. These funds are intended to be used to invest in Bitcoin. If the price of Bitcoin falls sharply after breaking through the $20,000 level, I will intentionally increase my Bitcoin position." (As shown in Figure 4 below, Chris Wood's weight on physical gold, today's weight, will drop from 50% to 45%.)

In the third quarter of 2002, the gold price level was $323 per ounce. If you did not choose to invest in gold at that time, you don’t have to feel that you have missed the opportunity, because now may be an opportunity to invest in Bitcoin. I hope you don’t miss out on Bitcoin as you missed out on gold.

Chart 4: Recommended long asset allocation for USD-based pension funds